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 May 6,
2007 Commentary (weekend edition)-
Has it really
been five weeks already? That seems hard to believe. At first I really missed
doing the commentary, but then I started to gain an appreciation for more time
to do other things. A move towards more balance in my life. Overall, I'm pretty
happy so far with the change. I did get more than a few comments about people
suffering withdrawal, and one student has taken to posting archived commentary
in the forum, under the topic 'I miss it already...', started as soon as I
began the new schedule. Overall, though, some interesting things have come to
light in regards to the change.
I kind of expected traffic and perhaps sales
to drop off when I initiated this change. The exact opposite seems to have
happened. Last month was my highest month this year for visits, according to my
website stats program. If my analysis of the stats is correct traffic to the
archive is solid and 'deep', including many views of the older material. And
this is with the significant decrease in traffic to the free weekend commentary
page, since there were no updates there. And book set sales have been 'brisk',
on par with the best months since last summer, as far back as I checked. All
this is not quite what I expected. I don't know, perhaps people worry if I made
the changes I have maybe I'll decide I like it so much I'm closing the project
down, and they better act now, or they may miss out. Or it could just be a
seasonal, or random, effect. Who knows. All in all I'm pleased that the change
didn't have any serious effects.
Before we get to today's work, I
want to mention a few curious things about the market, as far as what I have
been hearing. Keep in mind, one of the things I constantly talk about is that I
don't try to call tops or bottoms with my methodology. I cover that in here,
and substantially in the books and mentorships. I'm a trend follower. Although
the methodology can be used to 'play the lines', and I frequently create
potential trade areas that way, I still do it in the 'context' of the trend(s). Hence,
when a market is setting new all-time highs on a near daily basis, I am not
trying to call the end to that trend on the timeframe(s) the trend is obvious
on. I may consider a short on a lower timeframe, like an intraday Russell mini
on the 3-minute, for example, but I am not fighting the trend on a daily
set.
So, given that background information, what have I heard lately?
Well, we already know they have been saying for awhile that this is the longest
running bull in history; the longest running period without a 10% correction.
Look at China. After the sharp sell-off, it has just smoked to new highs,
making that little blip look like a tiny hiccup. On Wednesday I heard that
hedge fund leverage and exposure now tops 1998 right before LTCM blew up, and
potentially threatened the entire worldwide financial system. Look this one up
on the Internet and see what the source for that info is. Pretty
spooky.
Then on Thursday I heard this is the longest winning streak for the
DOW since 1929! We won't even get into the level of margin debt, and all the
other things that one might watch at times like this. On Friday I heard
Microsoft may buy out by Yahoo!, in order to 'take on' the 800-lb gorilla in
the space. Wait, didn't AOL buy Time-Warner in January of 2000, in the biggest
merger in history? Didn't they say something like with the new paradigm, this
merger changes the future course of everything?
The point is, these signs are being
laughed at pretty much by everyone I have heard. And those that don't laugh say
it may correct that 10%, but it will be the buying opportunity of a lifetime,
and they will be going in double-fisted with cash. But I just can't get '73-'74
out of my mind. Look at the history of this period, and the sentiment, as well
as where we are in the 16-18 year (on average 17.2 by the techniques I use)
cycle. We are almost exactly where we were in the cycle when they killed
it in the '73-'74 bear market. Yes, the inflation cycle and all that was wildly
different, but the oil price potential is far worse, in my opinion (notice the
expansion in Venezuela to nationalize way more than energy now, too). The cycle
seems to persist through various conditions.
Recall how they killed the market,
then they ran it to new all-time highs. The sentiment was very much as it is
now, with nothing but bullish talk, and how the bear was finally vanquished.
Then they drove it to new bear market lows from those new all-time
highs! And all this happened at the point in the longer cycle that we are
at right now. Sure, maybe nothing happens but a small correction. It does
appear we are in a global liquidity bubble, and creating asset bubbles is the
name of the game nowadays it appears. Perhaps this driving force will keep this
going a lot longer. But if we have the greatest exposure now with hedge funds
and derivatives ever (that's what the information I've seen says), what will it
be if this runs and runs and runs? What I'm getting at is that this could put
us at risk for a meltdown the likes of which we have never seen before.
Now, I'm not
trying to be a fear-monger here at all. I just don't like when everyone is on
one side of the boat and they all are crying out for everyone who isn't on the
boat yet to get on the boat, on their side. And they insist the boat can, and
will, take on many, many more passengers on that side. It's just something I
want to be aware of, and cautious about. And in the market, if things start to
unravel at some point, I want to be ready for that. That's all. It seems that
as they try to engineer us out of having recessions (which 'cleanse' the system
of previous excesses) they create a potentially bigger boom and bust cycle,
leaving us with prosperity or depression as the only remaining alternatives.
Just some food for thought.
I wasn't sure what to show today, and given that I want
to focus on ideas with some depth, it is always a challenge. I could try to
show well-chosen or 'best case' scenarios, but although they sure look pretty,
they perhaps don't have as much educational value. So for today I will follow
up on last month's chart of the month in KKD, which was chosen because it is a
former high-flyer (in the bubble days it traded under the symbol KREM), and is
borderline on the volume and liquidity, and can be a bit choppy. I'll then
follow up on rates from the last commentary, and throw in something interesting
that has been happening in USO with a line I showed on that one awhile back.
With that said, let's get to it.
I'll start out with where we were
on KKD at the time of the last commentary, and the posting of the chart of the
month on this, which was a weekly chart.
I hope everyone made a copy of last month's
chart of the month, so they have a reference point. I didn't show it here
because I wanted to conserve my chart space. Since this is also this month's
chart, you can look there (go to the home page, and click on the upper left
where it says Jim's Chart of the Month), and just subtract off five weeks and
see where we were.
So, instead of just falling down to the area of the two
lines and two retracements (just a framework, of course), KKD decided to just
chop sideways in a narrow range seemingly endlessly. 'They' sat just under 10
on this thing and took all that was offered. Although it surely could break
down from here, I wanted to look at what might be worth watching if it popped
up out of this tight coil, and then went for the lower line area.
Let me add
something obvious on my chart.
I added an 'adjusted' set and key .382 onto
my chart. If KKD popped up, I at least wanted to watch this area, time and
price-wise, to try to get clues about it, and possibly as a potential trade
area (PTA) itself. I have no idea if it will go anywhere near there, but the
area is obvious and clear, so I want to be ready. Perhaps it does a flush from
the coil to the lower area, and off it goes. This is a somewhat common scenario
in layouts like this.
The thing I want to take note of is that the
bigger area I am watching is very key, and if it fails, it may be cleared for
some additional downside. If I got a setup at that arrow area I could
potentially short KKD, and then hold if it hits the lower area, waiting to see
what it does. If it reacts and gives me price action that is close to
triggering to the upside I could close and take the trigger. If it doesn't
react and flushes, I'm already well positioned. This is just a possible premise
that may unfold, of many I am watching.
Let's see what KKD did from here.
They popped it right up to the area, and KKD
did it typical 'semi-illiquid' shake out in the area (this is why I chose KKD,
because it is frequently less than perfect in behavior), but ultimately the
area held, and it rolled hard off it. The .447, which I showed in case this
took more time and it hit the line way off to the right, was not respected at
all, the same as the upper trendline shown in black (note the small 'test' from
below, though).
The lower parallel, at the .486 (there is also a notable swing
point at this level, but I didn't include that line here for clarity), wasn't
respected at all. But, as you can see with the last area, this doesn't mean KKD
won't react vigorously from here. It is now in the 'now we see' category. This
is one they are posting on in the forum, and my comment was ...'and now we
see'. Now does the premise of a short off the first area make more sense?
Sometimes I can create a premise that seems the opposite of what I suspect may
happen, and use a PTA to play for position in the greater picture. So, with KKD
in here, 'now we see'.
Let's follow up on the 10-year index, on a weekly
chart.
I suggest that everyone go back to the last commentary and look that
over to be familiar with where we left off. I was playing the scenario game,
and two scenarios were a move right down to the D point, and an ABCD in the BC leg of a potential
ABCD, followed by a move down to the D point, as labeled on the chart. As you
can see , although five weekly bars have been added onto the chart since we
last looked, from this perspective not much has happened. Understand that this
is a 'close-up', and the layout is really on the monthly, perhaps even
quarterly chart. Things are happening, but not so much on this timeframe. I'll
just keep watching.
Let's drop to the daily chart, where I'll show where we
left off in the last commentary.
Make sure you looked at the charts from last
time before you proceed here. This is the chart I showed, with an obvious
trendline added on (shown in black), off the A and C points of the potential
pattern, as labeled on the last chart. I also added a line on there, which is
explained in the books. If this heads up to that area, I want to see what
happens there. Hmmm, Jim, this has a little of the feel of that KKD chart, even
though the area is constructed differently, and the layouts are different. Nice
observation, Grasshopper.
Let's see what happened from here.
Rates shot right for the area, and rolled
down hard to the lower division line, Notice the last thrust up into the area
came right off the median line. Rates have since had a big battle between that
median line and the division line. This is also a pattern in here, and
potentially two patterns. I have a new pattern I 'released' in the forum (it's
not ABCD related, it's something totally unique), and this is potentially
shaping up for that, too. So, now we see. Decision time is coming, and there is
no doubt how the capital flow goes from here will play into everything. Stock
markets, rates, energy, currencies (look at the Euro, Pound, Yen, Canadian,
wow!), metals (look at copper!), grains, the money looks ready to move.
I'll finish
with USO, the crude ETF.
Recall back at the arrow how I wanted to see
how crude would act with this line area? It was not acting like the area would
hold, but I also saw this 'crazy' trendline, shown in red. Keep in mind, this
line is not drawn from the two points on the upper left there, the second
anchor point is the first place it hits on this chart. The second point is the
first 'test' of the line. Now, my point here is not what crude did after the
area, it's what it did with that 'crazy' trendline later on. Once I saw crude
grind down and track that upper parallel, I suspected it was going to pop up
(this is another pattern/technique that I discuss in the members' archive, and in the
mentorships.
Notice how
the 'crazy' trendline held the action in check in the initial area, and after
it sold down it exploded up, essentially ignoring the line. Now here's where
most people might feel the line served its purpose, and they would 'clear up
their chart'. I try to leave lines on my chart that have served me well and
been 'tested' multiple times. Notice how USO came right back to the line and
bounced twice. This set up yet another one of my patterns, and that gave it the
impetus to finally take the line out. Now, will it 'test' this line from below?
I don't know, but I will have this line on my chart for some time to come, I
suspect. I see this phenomenon with old median lines and parallels all the
time. It's logistically tricky to leave a lot on the charts (sometimes I do
some 'archive charts' to refer back to), but without these 'artifacts' some
things that are right there may be missed.
As I wrap up, I can say that the
'action' has been spectacular, in my opinion, from a trading standpoint. It may
get even more spectacular if this thing 'dumps', and the bubble gets popped by
some event. Although this could fall from its own weight as it gets heavier and
heavier, I suspect it will take a shock event, and then 'all hell will break
loose' because it is so bloated. Or maybe it goes up and up and up. We'll only
know when we see it in the history books. From a trading standpoint, I just
follow the setups, and I don't try to pick tops or bottoms. I just 'go with the
flow', and limit exposure on the appropriate timeframe when a move gets real
'old'.
The next commentary will be next month's edition, posted by Sunday
evening, June 3, 2007.
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